China takes step to let market set foreign currency deposit rates

Bloomerg News is reporting today The People’s Bank of China said they will remove the ceiling on foreign-currency deposit rates across the city of Shanghai effective tomorrow for what it described as small accounts (The PBOC didn’t define the size of small accounts in today’s statement). The trial will start with institutional accounts and individual accounts will be added later based on “market conditions,” it said in a statement.

The PBOC set a ceiling of 3 percent on one-year U.S. dollar deposit rates in May 2005, according to its website. Banks are currently offering well below that level, with Industrial & Commercial Bank of China Ltd., the nation’s largest lender, paying 0.8 percent and China Merchants Bank Co. paying 0.7 percent, according to their websites.

Caps were in place to prevent hot money flows in a roaring economy, now with growth still strong but tailed back a bit, the government may feel more comfortable at this time in liberalizing this aspect of their banking system. Yesterday we reported, that SAFE, the agency in charge of China’s FX regulatory operations has planned to introduce yuan derivative instruments into the investment sector as well.

“We are just a few steps away from a complete interest-rate liberalization,” said Tang Yayun, a Shanghai-based analyst at Northeast Securities Co. “But the process could be delayed as the government battles against a slowing economy and rising borrowing costs. Naturally the deregulation would lead to higher deposit rates and eventually higher borrowing costs for companies.”

To read the full Bloomberg article, click here.

Source: Bloomberg

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